Parsing the multitude of ruminations about rating agency Standard & Poor's threat to downgrade all Eurozone members I am left wondering how this announcement comes as
a surprise to many market observers while failing to see the bigger picture
that was drawn so far in 2011.
Ring-fenced by exploding deficits, rocketing yields, stubbornly rising
unemployment especially among the youth and a true inflation closer to 10%
than official figures of three percent, the long term negative outlook for
the Eurozone has not changed in the past 11 months.
This action was overdue but again serves more to highlight the deficiencies
of an opaque rating process than act as a reliable guideline. After all, most
of these Eurozone countries have smaller debt/GDP ratios than the USA, which
passed the 100% mark this week and rises faster than EU deficits.
After the announcement of future unlimited money printing through dollar swap
lines from the major central banks on November 30, that propped up markets
and the Euro, the downgrade announcement is the next step in keeping a
volatile equilibrium during the demise of Euros and Federal Reserve banknotes
against the ultimate currency of all times; gold.
Rating agencies have been most timely to paint the chart with pivot points,
smoothing out spiking markets that wait desperately for the impossible: A
silver bullet solution to the Eurozone's woes that stem from a decade of easy
credit and the lowest interest rates in history, that
produced Spanish hairdressers as second home owners/debtors on annual
salaries of €12,000.
This is not going to happen. The Euro was initiated as a political goal for
deeper EU integration and lacks a Treasury as guarantor like in the US
The Coming Crisis Meetings in 2012
Its destruction will begin to follow a shock and awe script as the "no
more Euro core" members have yet to come to terms with the unpleasant
reality that a slowdown of debt growth will not be enough to get their houses
inoder again. Greece may be soon everywhere as
Eurozone nations will get squeezed between the
need to refinance €800 billion in government issues and the resulting
higher interest rates.
Here are some expected headlines from the coming 12 months that will keep
EURUSD in a rough balance while both will continue to decline against gold.
- Rating agencies will
downgrade Eurozone banks after downgrading Eurozone sovereigns
- EU in crisis meeting
about banks downgrades
- Big league banks
will issue more recession warnings for both Europe and the USA
- EU holds only a
limited emergency meeting
- Fearful investors
demand dramatically higher yields for government bond issues, deepening
the coming credit crunch, resulting in cancelled bond auctions
- EU announces another
crisis meeting about the credit crunch
- Merkel and Sarkozy announce
the next crisis meeting
- EU wants to find way
for a fiscal union without triggering referendums in member states
- EU announces crisis
summit because people voice widesprent dissent
- EU will try to fast
track a treaty change
- EU needs another
- EU member states
will demand referenda for any treaty changes
- EU hosts next crisis
- Deadlock in EU
weakens Euro further, will result in
- More crisis meetings
which lead again to
- More and renewed calls
for a EU Treasury and the ESM by those EU forces envisioning a United
States of Europe (that is actually only a UDE)
- The EU goes into the
next crisis meeting.
Before you now reactivate Solitaire on your screen, please keep in
mind that those are only EU headlines. Global geopolitical tensions will keep
markets lightfooted while new upheaval in Russia
and the Middle East are destined to keep the bloated forex
market running on high leverage. As in most cases of collapsing currencies it
may well be an exogenous shock that brings the Euro closer to its true intrinsic value.